Do you think there is a way to quantitatively model the difference between sharp Steve and noisy Nick? Or is this be something that is more intuition based on the guidelines you presented?
Absolutely you can go deep into that. There is a significant amount of academic work concerning adverse selection and noise trading. This example of two traders: one with perfect information, one with none is a huge oversimplification.
But I am not an academic, what I'm going for here is a more first principles / intuition approach showing how those classic ideas can be applied to prediction markets.
Thank you for the detailed response, I will for sure check out the podcast seems very interesting! I've enjoyed reading your posts, so keep up the good work!
Great post! Domer mentioned that he spent lots of time monitoring news when he put up tight limit orders to earn the liquidity rewards. Avoiding news related adverse selection is critical in liquid markets. Anecdotally, there are niche markets that get hit with one or two big uninformed trades which remove the already thin liquidity, so there is a balance between being prudent and not missing out on very good fills.
Thanks and yea I don’t think this is particularly intuitive about market-making but something a beginner might learn from experience - there are times you want to be on top of market and have depth behind (in the case of big uninformed flow) and times you absolutely don’t want to be.
Yea as it stands the liquidity in niche markets, perhaps most of the markets outside the top 30 on a given day, is not only too low at any snapshot in time, there's no one resupplying with fresh orders after some big noise trades. For that to improve, you need (1) more sharp traders tracking those markets, (2) trading algo that can quickly correct mis-pricing based on flow and news/data awareness. On Kalshi I often see notifications of a market moving from 50 to 5 or 60 to 98, more often than not I regret not being the counterparty.
Do you think there is a way to quantitatively model the difference between sharp Steve and noisy Nick? Or is this be something that is more intuition based on the guidelines you presented?
Absolutely you can go deep into that. There is a significant amount of academic work concerning adverse selection and noise trading. This example of two traders: one with perfect information, one with none is a huge oversimplification.
But I am not an academic, what I'm going for here is a more first principles / intuition approach showing how those classic ideas can be applied to prediction markets.
For another take on using intuition and "trader thinking" to make decisions check out this excellent podcast: https://www.complexsystemspodcast.com/episodes/think-like-a-trader-ricki-heicklen/
Thank you for the detailed response, I will for sure check out the podcast seems very interesting! I've enjoyed reading your posts, so keep up the good work!
Great post! Domer mentioned that he spent lots of time monitoring news when he put up tight limit orders to earn the liquidity rewards. Avoiding news related adverse selection is critical in liquid markets. Anecdotally, there are niche markets that get hit with one or two big uninformed trades which remove the already thin liquidity, so there is a balance between being prudent and not missing out on very good fills.
Thanks and yea I don’t think this is particularly intuitive about market-making but something a beginner might learn from experience - there are times you want to be on top of market and have depth behind (in the case of big uninformed flow) and times you absolutely don’t want to be.
Yea as it stands the liquidity in niche markets, perhaps most of the markets outside the top 30 on a given day, is not only too low at any snapshot in time, there's no one resupplying with fresh orders after some big noise trades. For that to improve, you need (1) more sharp traders tracking those markets, (2) trading algo that can quickly correct mis-pricing based on flow and news/data awareness. On Kalshi I often see notifications of a market moving from 50 to 5 or 60 to 98, more often than not I regret not being the counterparty.